Darkest fears dodged
The U.S. stock market in the first quarter suffered its heaviest losses in more than five years, but the surprise to many investors may be that things weren’t a lot worse.
Despite the housing-centered crisis of confidence that wreaked major damage on the nation’s financial system in the last three months, most key stock indexes finished the period down 10% or less.
“It was better than you might have feared,” said Richard Sichel, who oversees $1.5 billion in assets as chief investment officer at Philadelphia Trust Co.
And there was plenty of fear: Amid a wrenching credit crunch and a dive in consumer confidence, “a lot of clients are asking whether it’s going to be a depression,” said Andy Engel, senior analyst at investment advisory firm Leuthold Group in Minneapolis.
But it seems the stock market isn’t convinced that the economy is headed for even a recession, let alone something worse.
Even at their lowest levels of the quarter neither the Dow Jones industrial average nor the Standard & Poor’s 500 index was down more than 20% from its 2007 record high.
Recessions typically are accompanied by bear markets, the threshold for which is considered a drop of at least 20% in stock indexes.
The Dow, which edged up 46.49 points, or 0.4%, to 12,262.89 on Monday, gave up 7.6% in the quarter and is down 13.4% from its record high set in October.
The broader S&P; 500 fell 9.9% in the three months and is off 15.5% from its 2007 peak.
Other indexes were down more than 20% at their March lows but have since pared their declines.
Optimists say the market’s relative resilience belies worries that the economy could be headed off a cliff.
Bob Doll, chief investment officer for equities at money management giant BlackRock Inc. in New York, contends that recent economic data, “while hardly robust, do not signal recessionary levels.”
Outside of parts of the economy directly affected by housing’s woes, Doll said, “we think things are somewhere between ‘hanging in there’ and ‘OK.’ ”
On Monday the bullish case got help from a report on Midwest manufacturing activity in March. The Chicago branch of the National Assn. of Purchasing Management said its business barometer rose to 48.2 in March from a six-year low of 44.5 in February.
Although any figure below 50 signals contraction, the rise in the index last month exceeded analysts’ expectations.
The Federal Reserve’s unprecedented moves in March to calm the financial system have buttressed stock prices after a quarter of extraordinary volatility.
Most major market indexes reached multiyear lows March 10. That week, the Fed agreed to a massive lending program aimed at shoring up the finances of securities firms as well as commercial banks.
The central bank followed those moves with another cut in its benchmark short-term interest rate March 18, from 3% to 2.25%, the lowest level since February 2005.
Lenders of all kinds have been strapped for money as heavy losses on mortgage-related securities have caused financial firms to pull back on extending credit to one another. That squeeze caused the near-collapse of Wall Street investment bank Bear Stearns Cos. on March 14, leading to the firm’s surprise clearance sale to JPMorgan Chase & Co. two days later.
Some analysts believe the economy is likely to continue to suffer from the credit crunch, and that a recession is underway.
“We do think we’re in a recession,” Engel said. But he said the firm is telling clients that this will be “a normal business-cycle contraction,” not an economic crash.
Stock prices could head lower again in the next few months as investors fret about pinched corporate earnings, Engel said. Even so, he expects the S&P; 500 to drop no more than 25% from its 2007 high.
The big risk, analysts say, is that Wall Street could be underestimating how much consumers will rein in their spending as home prices slide.
“There’s a lot still to be concerned about,” said Philadelphia Trust’s Sichel. In particular, he worries that the job losses of recent months could deepen if nervous companies cut back further. The government will report on March employment Friday.
“If employment deteriorates we would get more concerned” about share prices, Sichel said.
Foreign stock markets appear more vexed about the economic outlook than the U.S. market. Most major foreign markets fell much more sharply than U.S. share indexes in the first quarter. Germany’s DAX index slumped 19% in the three months. Japan’s Nikkei-225 index tumbled 18% and the Shanghai composite in China dived 34%.
Because many foreign markets have risen much faster than the U.S. market since 2002 it isn’t surprising they would give back more in a global sell-off, experts note.
For U.S. investors in foreign shares the first-quarter losses were muted by the strength of most foreign currencies against the dollar, which tumbled on jitters over the economy. Although a weak dollar slashes Americans’ purchasing power it means foreign investments are worth more when translated into greenbacks.
The German DAX, for example, was down 12.4% in the quarter in dollars. Japan’s market was off 8.3% in dollars.
The euro ended the quarter at $1.579, up from $1.459 at the start of the period. The dollar was worth 99.69 yen, down from 111.71 three months ago.
Among Monday’s market highlights:
* The technology-heavy Nasdaq composite rose 17.92 points, or 0.8%, to 2,279.10. That trimmed the index’s loss for the quarter to 14.1%. Still, the drop was among the steepest of the main U.S. market indexes as investors dumped some of last year’s tech highfliers, including Google, which plunged 36% in the three months to finish at $440.27.
* The 10-year Treasury note yield ended at 3.41%, down from 3.44% on Friday and down from 4.02% at year-end. Fear of financial calamity caused some investors to flood into Treasury securities in the quarter, driving yields sharply lower.
* Near-term crude oil futures in New York fell $4.04 to $101.58 a barrel amid a broad pullback in commodities. Prices of many raw materials had rocketed for much of the quarter, in part because investors sought alternatives to stocks. Oil peaked at $110.33 a barrel March 13.
--
